RED President Steve Hendrickson discusses why Ukraine’s gas reserves may have influenced Russia’s decision to invade them.
As published in the August 30, 2022 edition of the Ralph E. Davis Associates (RED) Weekly E&P Update Newsletter..
I read a very informative essay recently in Foreign Affairs magazine, titled “When Trade Leads to War: China, Russia and the Limits of Interdependence”, by Dale Copeland. It examines the Russian invasion of Ukraine and China’s posture towards Taiwan from the perspective of access to raw materials and end-markets, rather than strictly ideological viewpoints.
First, Copeland states it’s an “influential strand of thinking in international relations theory” that “economic ties should place a much higher price on military conflict”. I think most observers would agree that U.S. foreign policy since World War II has emphasized building trade relations with former or potential adversaries to better align our interests and reduce the risk of conflict. Copeland goes further and points out that one of the reasons that trade is important to states is that it gives them the economic strength they need to develop their military and protect themselves. He uses realist theory to point out that expanding trade (access to raw materials and markets for finished products) creates the means (increased economic growth), but also the necessity of protecting access to those materials and markets.
When states perceive that their future access to markets and materials may deteriorate, they rationally may conclude that aggression is necessary to prevent that from occurring. According to Copeland, this explains the situation Japan was in during the 1930s.
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Copeland looks at how this thinking could have factored into Russia’s decision to invade Ukraine. The conventional logic is that Putin was “driven by his fears about Russian security – a concern that Ukraine was likely to join NATO in the near term – and his desire to go down in history as the man who helped rebuild the Russian empire.” He counters, however, that “the decision was likely reinforced by two important ways by something else: Russian energy exports to Europe.”
In 2010, large natural gas reserves were discovered in eastern Ukraine. These reserves have been estimated as greater than 1 trillion cubic feet (TCF), yet (according to a 2020 article), they remain relatively untapped. Development of these reserves will compete with Russian gas, likely reduce Russian economic strength, and limit their ability to play the “energy card” in future political conflicts, particularly for Ukraine. Given this potential loss of economic leverage, Copeland argues that Putin may have decided “it was now-or-never” to address the economic threat.
If you have a chance, I encourage you to take a look at the essay. I can’t do it justice here, but I thought it made a very compelling argument and illustrates the complex interplay between energy, trade, and foreign policies.
Steve Hendrickson is President of Ralph E. Davis Associates (RED), an Opportune LLP company. Steve has over 35 years of professional leadership experience in the energy industry with a proven track record of adding value through acquisitions, development, and operations. Before joining Opportune, Steve was the Principal of Hendrickson Engineering LLC, a licensed petroleum engineering firm focused on reserves assessment and property valuation supporting property acquisitions and divestitures. Steve began his career at Shell Oil as an engineer in Permian Basin waterfloods and CO2 floods. After 16 years at Shell, he focused on leading upstream oil and gas reserves evaluation/engineering projects serving in management or as an executive at several E&P companies, including El Paso Production Company, Montierra Minerals & Production LP and Eagle Rock Energy Partners LP. Steve is a licensed professional engineer in the state of Texas and holds an M.S. in Finance from the University of Houston and a B.S. in Chemical Engineering from The University of Texas at Austin. He recently served as a board member of the Society of Petroleum Evaluation Engineers (SPEE) and is a registered FINRA representative.
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